How a life insurance policy works

If you’re looking to build wealth, you’re bound to have heard of life insurance. How does it work and how should you choose?

Life insurance is a contract under which an insurer undertakes to pay you an annuity or a capital sum in return for a contribution that you define when you take out the policy.

Most of the time, life insurance is used to build up medium- or long-term savings, or even to prepare for retirement or inheritance. The money you save on a life insurance policy is not locked up; you can dispose of it whenever you like.

The two types of life insurance contract

Life insurance

The insurer pays out the savings in the form of a lump sum or an annuity when the insured person needs it.

Insurance in the event of death

The insurer pays the savings in the form of a lump sum or annuity to the beneficiaries designated in the contract if the risk covered occurs.

The various players involved

The insurer

The policy is taken out with the insurer, who will pay the annuity or capital sum if the risk covered occurs.

The subscriber

This is the person who applies to the insurer for the policy, and may be the beneficiary for life insurance, or a company or bank for group insurance.

The insured

This is the person on whom the risk is insured, and may be the same person as the policyholder.

The beneficiary

The person designated by the policyholder will receive the annuity or lump-sum payment if the risk materializes.

How to choose life insurance

When you’re looking for a life insurance policy, you need to take a close look at what’s on offer, and pay particular attention to the rate of return, management fees and minimum payments, as well as the support offered by the various insurers.

Once you’ve chosen an insurer, all you have to do is enter your personal details and make an initial payment. To fund your contract, you can choose between one-off, spontaneous payments and payments scheduled by month, quarter, half-year or year.

If you don’t know much about financial investments, you’ll find it much easier to manage your investments by opting for guided management rather than free management.

Taxation of a life insurance policy

Life insurance is only taxed at the end of the policy, not throughout its term. From the moment you apply for a withdrawal, surrender or closure of the contract the sum of money recovered is then subject to income tax and social security contributionsHowever, when closing in the event of deathspecific tax rules apply, and taxation is then calculated on the basis of the policyholder’s age at the time of premium payment.

Also read: Possible tax deductions

Marie Robin

Marie Robin

Marie est une rédactrice et une auteure spécialisée dans toutes sortes de domaines tels que le marketing numérique, le juridique et la finance. Elle écrit pour le magazine Adises Active depuis 2013.